Should we be excited about Woolworths’ plans to expand its share of the hardware and home improvement market?
Well that depends on whether you are concerned about the level of dominance that Woolworths already has in the retail sector.
With Woolworths already dominant in the grocery, petrol and liquor market it was only a matter of time before it tried to leverage its considerable market power into other retail sectors.
Clearly, last week’s hardware play is just another example of Woolworths spreading its tentacles and increasing its dominance across the broader retail market.
In doing so, Woolworths is no doubt seeking to expand its market power and with it the considerable pricing power that it already enjoys in key retail sectors.
What does pricing power mean? Quite simply, pricing power refers to the ability of companies like Woolworths to drive up retail prices to the detriment of consumers.
We already know that the dominance of Woolworths and Coles in the grocery sector is costing consumers dearly through higher grocery prices.
In fact, the dominance of Woolworths and Coles in the grocery sector has consistently given Australia one of the highest levels of food inflation in the OECD.
A careful review of food inflation in the OECD during the past ten years reveals a bleak picture in which Australian consumers keep getting hit with higher grocery prices.
With Australian consumers paying higher grocery prices than most other countries in the OECD, serious questions need to be asked about the growing dominance of the major supermarket chains.
Consumers certainly don’t need a repeat of those higher grocery prices in the hardware and home improvement sector.
Unfortunately, that’s exactly what will happen if Woolworths and Bunnings/Coles come to dominate the hardware and home improvement sector to the same extent that they have done in groceries.
For those dismissive of the threat to competition and consumers posed by the growing dominance of the major supermarket chains, it’s timely to bust some myths.
For starters, Coles and Woolworths are not always the cheapest on price or the most convenient. Similarly, small businesses are not always the most expensive on price.
What keeps both the big boys and small businesses honest is the presence of strong and diverse competitors in the local market. Where competition is weak or fails in the local market, prices go up. Conversely, prices are lower where there are strong independents in the market.
With market dominance giving companies substantial pricing power, there can be no doubt that the Woolworths hardware play is clearly designed to extend Woolworths’ dominance into the hardware sector with the ultimate goal of increasing its pricing power in that sector.
Woolworths already has a presence in the hardware market with the extensive hardware and home products range in its Big W stores and its more limited hardware and home product offer in its supermarkets.
Through its hardware play Woolworths will be able to quickly and substantially expand its share and control of the hardware market.
Its strategy is simple. First, Woolworths will quickly neutralise and knock out the independents.
These independent hardware stores are a strong source of competition. They are spread throughout the suburbs and have provided price competition and a level of service that has enabled them to remain competitive.
The strong competition provided by these independent hardware stores is clearly a thorn in the side of any big business seeking to expand its dominance in the hardware sector.
A smart operator like Woolworths would know that and is clever and powerful enough to do whatever it takes to neutralise those independent competitors.
This explains the Woolworths bid for Danks, the independent distributor to over 1500 independent hardware stores.
Woolworths knows full well that by taking over Danks it will know the business details of all the independents that Danks supplies and will simply buy out the more successful independents as quickly as possible to eliminate them as competitors.
In addition, by adding 150 new “big box” hardware and home improvement centres, Woolworths will also be trying to knock out the independents around the “big box” centres so as to further eliminate independent competitors.
In this way, the Woolworths hardware play is simply designed to knock out independent hardware stores by taking out the distributor to over 1500 independents so as to leave those independents exposed to a Woolworths “buy out” or “knock out” strategy to remove the independents from the market.
With the Woolworths hardware play inevitably leading to the increased dominance of both Woolworths and Bunnings/Coles in the hardware sector, consumers should be prepared for higher hardware prices over time.
We know from the grocery sector that Woolworths and Coles shadow one another on price and they will simply do the same in hardware.
In short, increased dominance by Woolworths and Bunnings/Coles in the hardware sector will bring higher hardware prices for consumers as Woolworths and Bunnings/Coles will just shadow one another on price once they knock out the independent operators. The major supermarket chains do that in groceries and petrol, and they will do the same in hardware. Higher prices are not good for consumers.
With this context, the Woolworths hardware play is a critical test for Australia’s competition laws and is further proof of the need for effective laws against creeping acquisitions by the likes of Woolworths designed to knock out independent competition in key retail markets so as to push up prices to the detriment of consumers.
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